Retirement may become nation's biggest challenge

Monday

Jul 28, 2014 at 12:01 AM

Brenda P. Wenning

Retirement is about to become the country's greatest economic and financial challenge.Why? Baby boomers are retiring. As a result, the number of seniors 65 and older in the United States is expected to more than double from 39 million today to 89 million in 2050, according to U.S. News and World Report.Baby boomers may retire at the same age – or an even younger age – than their parents did, but they will live longer. On average, a man reaching age 65 today can expect to live to 84, while a woman turning 65 can expect to live to 86, according to the Social Security Administration (SSA).That's an average of 20 years of retirement. In comparison, in 1950, the average man lived to age 65.6 and the average woman lived to age 71.1, so retirement typically lasted just a few years.Sources of incomeTo support themselves during a 20-year period, retirees have three sources of income – Social Security payments, pensions and personal savings.Social Security is a pay-as-you-go system. When it was created, there were 41 workers for every retiree. Today, the ratio is three workers for every retiree. The Social Security Administration projects that the ratio will drop to 2.2 workers per retiree by 2030 and just 1.8 workers per retiree by 2070.Fewer workers paying the Social Security benefits of more retirees will put a strain on the system. The average retirement age will have to increase, the amount of benefits paid out will have to decrease or other changes will be necessary. Otherwise, the system will become bankrupt.Until the 1970s, employees typically received a defined-benefit pension from their employer, which paid out a defined amount for life after the person retired. As people began living longer, the cost of pension benefits became too high for most employers to bear, so they switched to defined contribution plans, such as 401(k) plans.While employers may contribute matching funds to defined-contribution plans, employees make and manage their plan contributions. An employee today can contribute up to $17,500 a year into a 401(k) plan on a tax-deferred basis – but many choose to contribute nothing.According to the National Institute on Retirement Security (NIRS), the average working household has virtually no retirement savings. The median retirement account balance for all households, including those with no retirement accounts, is just $3,000 for all working-age households and $12,000 for near-retirement households. The NIRS also found that four out of five working families have retirement savings of less than their annual income.If Social Security and pension plans aren't meeting the need for retirement costs, the only remaining source of income is personal savings. But ConvergEx Group found that, "only 58 percent of us are even saving for retirement in the first place. Of that group, 60 percent have less than $25,000 put away ... a full 30 percent have less than $1,000."Consumer debtAs these staggering statistics show, Americans need to save more for retirement. But saving is becoming increasingly difficult, as personal income has been falling and consumer debt has been rising. Consider:n Median household income has fallen annually for the past five years, from $55,627 in 2007 to $51,017 today, based on Census Bureau statistics. That's a drop of 8.3 percent.n U.S. consumer debt totals $11,360,000,000,000, according to the U.S. Census Bureau. The average credit card debt for Americans is $15,279, the average student loan debt is $32,250 and the average mortgage debt is $149,925.n Consumer credit has increased 22 percent in just three years, CNBC reported. More than half of Americans have subprime credit, meaning that they will not qualify for traditional bank loans and will have to pay a high rate of interest if they have to borrow money.n Nearly half of Americans are living "paycheck to paycheck," according to Time magazine.What to doThe retirement outlook for many is glum, but not hopeless. The key, of course, is to plan ahead. Establish goals and stick to your goals. Otherwise, you're likely to reach retirement age and be unable to afford to retire.Your retirement plan should include realistic goals and a regular savings plan. And remember that it will be useless unless you stick to your plan. What else can you do?Live within your means. Do not spend money you don't have. Cut up your credit cards if you have to, but do not add to your debt. The more debt you have, the more difficult it will be for you to pay it off.Pay off your debts. Until you pay off your debt, you can't begin to save. At a time when interest rates are near zero, fixed-rate credit cards are charging annual interest of 13.02 percent, while variable-rate cards are charging 15.83 percent, according to Bankrate.The money in your checking or savings account is earning almost no interest. If possible, use it to reduce your credit card debt. If necessary, have a consumer credit counselor help you to consolidate your debt.Know your assets. Do you own your home outright? Do you plan to downsize when you retire? If so, the difference can help fund your retirement.Do you expect to inherit any money? Do you have other assets of value, such as a boat or a valuable coin collection? Even if you have not saved adequately, you may have sources of income that can help bridge the gap between what you have and what you need.Know what you need. You may be thinking that your cost of living will be lower when you retire. That may be true, but with more time available, you will likely want to do the things you have not had time to do before. You may want to travel, golf or dine out more frequently, or see Broadway plays or concerts.Entertainment costs money. Make sure you're adequately prepared.You may also face unanticipated expenses, especially for health care. For example, in Massachusetts, long-term care in a nursing home costs an average of $126,290 per year for a semi-private room and $134,320 for a private room.As staggering as those costs may seem, they are likely to increase significantly, not only due to Obamacare and other regulatory requirements, but because of increasing demand, given the number of retiring baby boomers.Many will rely on Medicaid to pay for long-term care, but that option is available only to people who have virtually no assets, so you will need to spend your children's inheritance to qualify. You can give away your assets while you're alive, but there is a five-year look-back period.During retirement, Medicare is available to pay for health-care costs other than long-term care, but the system is nearly bankrupt. Medicare trustees warn that it will become insolvent by 2026, but some believe it will become insolvent even sooner.Invest wisely. IRAs and 401(k) plans provide an opportunity to invest on a tax-deferred basis, with matching funds from employers typically available for 401(k) contributions. Roth IRAs and Roth 401(k) plans provide an opportunity to invest after-tax income and never have to pay tax on the earnings.Meet with an expert to determine which option is best for you, how much you should invest to meet your goals and where you should invest your money. An asset allocation strategy, in which investments are divided between stocks, bonds, cash and alternative investments, can be used to reduce risk while helping you to meet your investment goals.Retirement may become the country's greatest economic and financial challenge, but with proper planning, you'll be up to the challenge.Brenda P. Wenning of Newton is president of Wenning Investments LLC in Newton. She can be reached at Brenda@WenningInvestments.com or 617-965-0680. For additional information, visit her blog at www.WenningAdvice.com.